Co-investments, an essential performance lever in Altarocs strategy
Summary
Written transcription
Damien Hélène: Louis, could you explain what a co-investment is?
Louis Flamand: Yes, of course. Co-investing means investing in a company alongside a private equity fund. Let's take the example of a manager who has raised a fund of 100 million and wishes to invest no more than 10%, i.e. no more than 10 million, in a single company. Let's assume that, in order to take control of a company, he needs to invest 12 million, i.e. 2 million more than the maximum amount he is authorized to invest with his fund. In this case, one of his options is to offer certain investors in his fund the opportunity to co-invest 2 million alongside him in the company. The advantage for co-investors is that they pay neither management fees nor performance fees. The performance potential of a co-investment is therefore greater than that of an investment in a fund.
Damien Hélène: So what is Altaroc s interest in co-investing in companies?
Louis Flamand: There are three major advantages. It allows us (1) to overexpose ourselves to deals that seem to us to be the best investment opportunities alongside our managers. We always try to co-invest with partners who have the best individual track records within their firms, in the sectors where our managers have the greatest expertise. Secondly, it allows us to eliminate a layer of fees and therefore lower portfolio management costs. And thirdly, it enables us to accelerate the deployment of our Vintage funds. The funds we invest in take four or five years to invest, whereas our co-investment pocket takes around two years to fill.
Damien Hélène: Do we only co-invest with our portfolio managers?
Louis Flamand: Yes, because investing alongside a manager you don't know is very risky. Because (1) you don't have much time to analyze a co-investment. The manager often asks for an answer within 2 to 3 weeks. Secondly, it is the manager who controls the investment. A co-investor almost never sits on the board of directors. His capital is represented on the board by the manager with whom he co-invests. It is therefore essential for a co-investor to be confident in the quality of the manager with whom he is investing.
Damien Hélène: And why allocate only 20% of Odyssey to co-investments?
Louis Flamand: There are two major reasons. First, a dealflow limit. Access to co-investment is difficult. You have to build strong relationships with managers who do. Secondly, risk management. The 5 to 7 funds we invest in with each of our Vintage offer a broad diversification of around 150 companies. Our co-investment pocket, on the other hand, comprises 6 to 8 companies, i.e. 20 times less diversification. It would therefore be risky to allocate more than 20% of our Vintage to co-investment. We always bear in mind that we're investing the capital of private clients, so risk management is very important to us. Our co-investments target solid companies of significant size, defensive companies, most often with strong growth potential. In addition, we feel comfortable allocating 20% of our funds to co-investments because (1) we have a good dealflow, as our investment team is highly experienced and has therefore developed strong relationships with numerous managers over several decades. And secondly, our two co-founders have a combined 80 years of direct investment experience as fund managers. And that's a real competitive advantage for Altaroc when it comes to analyzing co-investments. Because even among the biggest North American institutional funds of funds, you're unlikely to find partners who have made such a career in direct private equity.
Damien Hélène: Thank you very much Louis. That was very clear. I now welcome Claire Peyssard.
